Cover story: Investment

Cover story: Investment

Your principles needn't cost you a penny when you invest, judging by the performance of Britain's biggest and oldest ethical fund, Stewardship Growth.

Launched in 1984 by Friends Provident, the fund has nearly £600m under management. Over the past year savers in the fund have enjoyed a gain of 19.5%, comfortably beating the average UK equity fund which is ahead 13.3%.

Over three years (covering a period when the stock market was in steep decline) it also outperforms, rising 8.7% against the average fund's 5.1% gain.

Not all ethically invested funds enjoy such performance: the table below shows a selection of UK-invested ethical funds, showing returns ranging from -11.9% at Axa through to a gain of 10.1% for Allchurches Amity fund. However the range of returns is typical of unit trusts in general.

Broadly speaking, ethically invested funds tend to have higher weightings in the shares of small and medium sized companies rather than the FTSE100 giants. For example, they usually screen out the oil giants such as BP and Shell, which alone make up 15% of the FTSE. They have a bias to growth rather than "value", partly because they exclude the high-dividend, low growth stocks such as tobacco firms. They also tend to suffer from greater volatility of return than conventional trusts.

Stewardship spokesman Jason Hollands says: "In the case of the Stewardship funds, restricting the universe of stocks in which we can invest has not cost.....continued below

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investors performance as many intuitively suppose it must. Far from it, because the market has become so skewed to a smaller cluster of oil and banking stocks, it means that Stewardship is forced to be a genuine stock-picking fund operating in the more interesting mid- and small-cap ends of the market.

"As this week's proposed ban on smoking in places serving food shows (plus the proposed clampdown on junk food advertising), ethical investment should not just be considered as an option for people with strong convictions. Think of it is a risk control approach. Funds which are alive to these risks will actively engage with companies or, in stricter green funds, avoid certain types of business altogether."

Around £4bn is now held in ethical funds and "engagement" is now notching up a number of successes, such as Premier Oil's withdrawal from Burma.

Clare Brook, who looks after the £650m that Norwich Union invests on a "socially responsible" basis, says: "It's a helpful filter rather than a hindrance, and it gives you a head start rather than leaving you trailing. The companies that are going to trip up environmentally are usually the companies that no investor will want to be in."

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